China: Saying yes to more monetary easing

China’s central bank’s increasingly dovish pivots suggest that achieving the official growth aim of “around 5%” may be more akin to a minimum target, as officials appear to show increasing willingness to support the economy.

In view of the surprise PBOC cut to the 7-day reverse repo rate, we now anticipate more rate cuts in Q2 and Q3. This will bring total monetary easing to the same extent as the cycle in 2022, but less expansionary than that seen in 2020. A prolonged easing cycle leading to a sustained credit upswing is unlikely to be PBOC’s intended outcome.

What you will learn:

• Recent reports hinting at forthcoming piecemeal support for the property sector and on policy banks’ relending programmes for industries are also congruent with our new policy assumptions. Improving China’s credit multiplier will necessarily require more efficient and productive allocation of resources.
• Rate cuts at this juncture might help assuage investors’ immediate concerns over the lack of policy responses to slowing growth momentum, but the confidence boost is unlikely to last in the context of a slow-burning property sector correction, still-weak income growth, and a deteriorating external demand outlook.
• Furthermore, unless credit demand and banks’ risk appetite rise sufficiently, the real economy boost from lower rates and increased credit supply are likely to be marginal, making our baseline forecast of a managed slowdown a more likely prospect.